SAP has scrapped its mid-term targets and will focus on the cloud market, despite double-digit in growth of earnings per share and cash flow. As a result of SAP’s transition to cloud, they aim to target more than US$26 billion in cloud revenue by 2025 in spite of COVID-19 setbacks.
SAP’s strategy is to help every business run as an intelligent enterprise – 77% of the world’s transaction revenue touches an SAP system.
In the third quarter of 2020, SAP’s current cloud backlog was up 10% year over year to US$7.79 billion, which was up 16% at constant currencies, amid continued COVID-19 effects on SAP’s cloud business. However, continued lower transactional revenues, particularly in SAP Concur, negatively impacted cloud growth by 6%.
Cloud revenue from SAP’s SaaS/PaaS offerings, that do not belong to Intelligent Spend, and its IaaS offering grew by 26% and 24%, respectively.
The operating cash flow for the first nine months of the year was also up 54% year-over-year to US$6 billion. Operating cash flow benefitted from reduced restructuring related payments and lower income tax payments.
With this in mind, SAP no longer anticipates a meaningful recovery in SAP Concur business travel-related revenues for the remainder of the year 2020.
SAP is therefore altering its full year 2020 outlook and is now expecting cloud revenue to drop from US$9.8 – 10.2 billion to US$9.4 – 9.6 billion, while cloud and software revenue is forecast to drop from US$27.6 – 28.3 billion to US$27.3 – 27.8 billion.
The COVID-19 crisis has opened up opportunities to accelerate for transformation. Customers are looking to move to the cloud at an accelerated speed for greater resiliency and agility.
SAP is responding to these market demands by providing the technology and expertise to help its customers migrate their existing IT environments to the cloud and transform their businesses end-to-end. SAP’s Business Technology Platform will be the foundation for all SAP applications, integration, customer and partner ecosystem extensions. There is also room for new innovations such as Industry Cloud and Business Network.
In addition, SAP plans on accelerating the modernisation of its cloud delivery, arriving at a consistent delivery infrastructure earlier than planned. As a result, SAP is set to drastically increase the efficiency and resiliency of its cloud delivery operations.
SAP will also increase research and development investments to accelerate its customers’ transformation in the cloud and establish a prominent position in new categories like Industry Cloud. The impact of these new strategy initiatives, together with macroeconomic factors, are reflected in the SAP’s updated mid-term ambition.
“Our expedited move to the cloud will ensure we continue our path as a cloud growth company while we remain focused on cost efficiency. These actions and our resilient business model position us well to meet our new ambition targets as uncertainty recedes,” said Luka Mucic, the CFO of SAP.
The reset abandons a strategy that was made ‘once upon a pre-COVID lifetime’, said industry analyst Josh Greenbaum at EAConsult.
If the COVID-19 pandemic is taken into account, this is expected to impact the demand environment, particularly in hard hit industries, through at least the first half of 2021 pushing out the achievement of key metrics such as cloud revenue, total revenue, and operating profit, by up to two years.
The acceleration of customers’ move to the cloud and subsequent business transformations drive the new ambition’s cloud revenue target of more than US$26 billion by 2025. SAP expects shifting customers more quickly to lower-margin cloud hosting from its traditional cash-cow software licenses would ‘negatively impact the 2023 operating margin by approximately 4 to 5 percentage points relative to the previous mid-term ambition’.
Christian Klein, the CEO of SAP is confident that ‘COVID-19 has created an inflection point for their customers. The move to the cloud combined with a true business transformation has become a must for enterprises, to gain resiliency and position them to emerge stronger out of the crisis’.
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